China struggles to avoid past mistakes in controlling food prices

With food prices facing growing upward pressure, economists are using the term 'agflation' to refer to the country's soaring agricultural commodity prices

By Guy Newey / AFP , HONG KONG

Rocketing food prices in China have sown deep concern among the communist leadership, ever wary of social unrest, as they fumble to control inflation without repeating past mistakes, analysts say.

Overall inflation in China is running at a 10-year high -- around 6.9 percent in November year-on-year, official statistics show.

Inflation is now being driven almost exclusively by increases in the price of food, in particular the staple meat, pork, which has spiked 60 percent year-on-year.

Prices have faced even greater upward pressure in recent weeks, as severe weather has crippled the country's transport system at the time demand is greatest, over Lunar New Year, the major annual holiday when millions of people return home.

A report by Credit Suisse said 10 percent of China's farming land has been affected by the extreme cold, and 1 percent could see a complete loss of crops and vegetables.

Price increases have been seen in food items ranging from cooking oil to apple juice, as China's growth and global demand creates what economists have dubbed "agflation" referring specifically to rises in prices of agricultural commodities.

Analysts say authorities in Beijing are becoming increasingly concerned about the prospect of food prices getting out of hand, but add that the problem is not yet approaching the levels that led to widespread popular dissatisfaction almost a decade ago.

"They [the central government] are increasingly nervous about it," said Andy Rothman, Shanghai-based China Macro-Strategist for CLSA. "But it is a long, long way from the inflation problems before 1989."

Last month, the National Development and Reform Commission announced tightened supervision of prices for grain, edible oils, meat, poultry, eggs, feed and other items in both wholesale and retail markets.

This followed the announcement in late December that from Jan. 1 the government would slap taxes ranging from 5 percent to 25 percent on exports of a range of products including wheat, corn, rice and soybeans to try and ensure stable food supplies at home.

The actions appeared to be stoked by memories of the widespread protests that resulted from the government's clumsy handling of food price controls that led to inflation of around 50 percent in the summer of 1988.

Public anger about inflation prompted the demonstrations that the following summer morphed into anti-government protests and the death at the hands of the army of hundreds, possibly thousands, of unarmed civilians in central Beijing.

"Most of the price rises were for staple foods, thereby causing the maximum economic pain to the maximum number of people," Joe Studwell wrote in his 2002 book The China Dream.

Vincent Chan, head of China research for Credit Suisse, cited another change in recent months, saying people were now expecting price rises, an often self-fulfilling situation that leads to even higher market prices.

"If you look at the statistics, then China's inflation problem is simply a food inflation problem," he said. "In the past, we have not really had a problem of inflation expectation, [but] this year we have already seen that. And that normally means that prices will rise."

Rothman said pork price inflation was only a short-term problem, and predicted prices will start to fall back later this year.

"This is a supply problem. In 2006, pork prices had a 10-year low. There was not any incentive for farmers to raise more pigs. This was made worse by blue-ear disease, which stopped supply when demand was rising," he said.